Politics to continue influencing the pounds direction

May 30, 2017 09:19 AM

After suffering its heaviest week of losses so far in 2017, the British pound is attempting to consolidate around 1.28 against the U.S. dollar. I personally think that politics will continue to influence the direction of the British pound, and I believe that there is further momentum for the currency to fall with the UK general election being a little over a week away. In general, the markets do not like uncertainty and this is the recurring theme for the UK at present with another election around the corner and ongoing Brexit uncertainty continuing to dominate news headlines.

My view is that even following the dip lower from the 2017 highs above 1.30 is that the financial markets are still underpricing the risk of an unexpected outcome to the election next week. Investors in general stacked their cards heavily in favor of UK Prime Minister Theresa May being declared the winner following the unexpected calling of a snap election, but opinion polls are currently showing that the race to winning the election is going to be close. I can’t help but think that recent history could be repeating itself with the markets currently underpricing the risk of an outcome that could differ to what the markets expect, which is a Conservative victory on 8 June.

USD/JPY – a game of politics vs economics
The British pound is not alone in being underpinned to political risk, with politics vs. economics being the name of the game when it comes to trading the U.S. dollar/Japanese yen (USD/JPY) currency pair. I believe that politics will continue to dictate the direction of this pair as we head into the second half of 2017, and I am actually favoring towards the Japanese yen covering further ground against its counterparts on the back of safe-haven buying.

A lack of optimism around the likelihood that President Trump will be able to push forward with his legislative reforms will put the spotlight firmly on Washington, and I think that this will result in further pressure on the USD. Any further market uncertainty in the United States will eventually lead to investors being lured back into the safe-haven appeal of the Yen.

EUR/USD – facing near-term selling pressure
The likelihood that the ECB will repeat its dovish rhetoric during its Central Bank meeting in June is encouraging traders to enter selling positions on the Eurodollar after the pair reached new 2017 milestone highs above 1.12 last week. Despite economic data around Europe continuing to improve confidence that the economy has turned a corner, the market is swaying towards the belief that the ECB will repeat in June that the economy still requires ECB stimulus and this could result in the Eurodollar slipping further towards 1.10.

Oil markets remain pessimistic on OPEC outcome
Investors remain unimpressed with the outcome of the OPEC meeting late last week, with the commodity once again encountering selling pressure around $50. The general view is that the OPEC meeting outcome was very predictable with investors pricing in a nine-month extension to the production cut some time ago, and confirmation of what was already expected beforehand just led to a “sell-on-news” opportunity for traders.  I maintain the viewpoint that the mindset of investors will remain tilted towards sell-on rally opportunities and I think traders are likely to continue entering selling positions around $50 as they have done for a number of months.

The negative expectations on the oil markets are not due to a lack of effort from the side of OPEC; it is more linked to the belief that US Shale producers will turn the volume up on increased production. The ongoing threat to investor sentiment when it comes to the oil markets is that no matter what OPEC try to do to rebalance the ongoing oversupply in the markets, U.S. shale producers will be able to offset the efforts by increasing inventories from their side. 

Can gold keep its feet above $1,260?
Gold managed to conclude trading last week above $1,260, and the outlook is that there is room for further appreciation towards $1,275 as long as the precious metal is able to keep its feet above $1,260. There are a couple of factors that can encourage a supportive view towards a stronger valuation in gold over the coming weeks, including the probable U.S. interest rate increase in June already being priced into the financial markets and any market uncertainty over the impending UK general election encouraging a rally for safe-haven assets.

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